Understanding Annuities and Their Longevity
Annuities are financial products that offer guaranteed income streams for a specified period or for the lifetime of the annuitant. They are often considered a valuable tool for retirement planning, providing a reliable source of income to supplement Social Security and other retirement savings. However, one common concern among potential annuitants is the possibility of outliving their annuity, leaving them without income in their later years.
Understanding the Types of Annuities
To address this concern, it is essential to understand the different types of annuities and their payout structures. Annuities can be broadly classified into two categories:
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Immediate Annuities: These annuities begin paying out income immediately after purchase. The payout period can be for a specific term, such as 10 or 20 years, or for the lifetime of the annuitant.
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Deferred Annuities: These annuities allow the annuitant to accumulate funds over time before they begin receiving income payments. The payout period can also be for a specific term or for the lifetime of the annuitant.
Can You Outlive an Immediate Annuity?
Lifetime Immediate Annuities:
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No, you cannot outlive a lifetime immediate annuity. These annuities are designed to provide income for as long as the annuitant lives, regardless of how long they live. The insurance company that issues the annuity assumes the longevity risk, guaranteeing income payments even if the annuitant lives longer than expected.
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However, it is important to note that the payout amount for a lifetime immediate annuity will be lower than the payout for a term-certain immediate annuity. This is because the insurance company needs to spread the payout over a potentially longer period.
Term-Certain Immediate Annuities:
- Yes, you can outlive a term-certain immediate annuity. These annuities pay out income for a specific period, such as 10 or 20 years. If the annuitant lives longer than the specified term, they will no longer receive income payments.
Can You Outlive a Deferred Annuity?
Lifetime Deferred Annuities:
- No, you cannot outlive a lifetime deferred annuity. Similar to lifetime immediate annuities, these annuities are designed to provide income for as long as the annuitant lives. The payout period begins when the annuitant chooses to annuitize the contract, and the income payments continue for the rest of their life.
Term-Certain Deferred Annuities:
- Yes, you can outlive a term-certain deferred annuity. These annuities pay out income for a specific period after the annuitant chooses to annuitize the contract. If the annuitant lives longer than the specified term, they will no longer receive income payments.
Factors Affecting Annuity Longevity
Several factors can affect the longevity of an annuity, including:
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The type of annuity: Lifetime annuities provide income for life, while term-certain annuities have a limited payout period.
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The age and health of the annuitant: Younger and healthier annuitants are more likely to outlive their annuities than older and less healthy annuitants.
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The payout period: A longer payout period increases the risk of outliving the annuity.
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The interest rate environment: Higher interest rates can lead to higher annuity payouts, reducing the risk of outliving the annuity.
Strategies to Mitigate the Risk of Outliving an Annuity
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Choose a lifetime annuity: Lifetime annuities offer the peace of mind of knowing that you will receive income for as long as you live.
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Consider a shorter payout period: If you are concerned about outliving your annuity, you can choose a shorter payout period. This will result in higher income payments, but it also increases the risk of running out of money earlier.
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Purchase an annuity with a guaranteed minimum withdrawal benefit (GMWB): A GMWB guarantees that you will receive a minimum amount of income, even if the underlying investments in the annuity perform poorly.
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Combine an annuity with other retirement income sources: Diversifying your retirement income sources can help to mitigate the risk of outliving any one source of income.
While it is possible to outlive an annuity, especially a term-certain annuity, there are strategies that can help to mitigate this risk. By understanding the different types of annuities and their payout structures, you can choose an annuity that meets your individual needs and financial goals.
Whether you’re looking for steady retirement income or a low-risk investment, check the fees and the fine print
Social Security was never intended to cover all of your retirement costs, and pensions are uncommon unless you work for the government. In times of economic uncertainty, knowing that your investments have some protection from a volatile market or that another payment is automatically made each month can allay fears about outliving your savings.
That may help explain why annuities are booming. Annuity sales reached a record high of $385 billion in 2023, up 23% from the year before, according to LIMRA, a research organization that supports financial services and life insurance companies.
Annuities are mainly provided by insurance companies, though brokers or advisers may sell them on their behalf. Annuities are available in a variety of shapes and sizes, with widely differing costs and uses. Certain types are designed to offer a consistent source of income and nothing more, while others resemble investment vehicles and can be significantly more intricate. If you’re thinking about getting an annuity, here are five things you should know.
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Annuities require a commitment
Once you give your lump sum to the insurance company, you won’t be able to access it with an income annuity. A life-only annuity offers the highest monthly payouts because it pays out for the duration of your life, regardless of how long you live.
Before choosing this course of action, there are two crucial things to think about. First, whether you pass away two years after purchasing the annuity or thirty years later, the payouts cease. Second, the annuity covers only you. If a spouse survives you, they get nothing.
Annuities can be purchased with a version that assures payments will continue for a minimum of ten years, even in the event that you pass away before then. A joint annuity, which pays out for as long as you or your spouse live, is an additional choice. However, the monthly payments in both scenarios would be less than those of a life-only annuity. When they are both 65 years old, a couple investing $100,000 in a joint-life immediate annuity will receive $543 per month for the rest of their lives.
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It is only possible to access the funds as a lifetime income stream; additional withdrawals are not permitted. Therefore, exercise caution before investing a significant portion of your savings in an income annuity. It’s crucial to have additional money on hand for unforeseen costs and emergencies.
One method for determining how much to invest in an immediate annuity is to total your retirement expenses, deduct any guaranteed income sources you currently have (like Social Security or a pension), and then think about purchasing an annuity to cover all or part of the shortfall. Health & Wellness.
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A deferred-income annuity allows you to invest a lump sum now but postpone starting payouts if you don’t currently need the annuity to supplement your retirement income but anticipate that you will in the future.
One advantage: The payments are much bigger. For instance, our 65-year-old man would receive $1,401 a month for the rest of his life if he invested his $100,000 in a deferred-income annuity that starts paying out at age 75. A major warning: He will receive nothing if he passes away before then.
You can obtain a deferred-income annuity that, in exchange for smaller payouts ($1,237 per month in the investment example above), ensures that you or your heirs will receive at least as much as you initially invested.
Deferred-income annuities, sometimes known as “longevity insurance,” can help protect against longevity risk, which is the possibility that you won’t have enough money if you live longer than you anticipate. Nonetheless, some people are hesitant to fork over so much cash for a payout that might never come through, or might take decades.
According to Spencer Look, associate director of retirement studies at Morningstar’s Center for Retirement and Policy Studies, “it’s a very long-term commitment.”
The HUGE Mistake That 99% of Annuity Owners Make
FAQ
What happens if your annuity runs out of money?
How long will an annuity last?
Can an annuity last forever?
Has anyone ever lost money in an annuity?
Can an annuity run out of money?
There are several ways an annuity can run out of money. The annuity can be depleted if withdrawals are taken from the annuity through a penalty-free withdrawal. Additionally, if the annuity is annuitized and a period certain payout is selected, the annuity can also be exhausted.
Should you use an annuity for retirement income?
Using an annuity for retirement income can be very beneficial. Annuities are the only financial vehicle that can pay you a guaranteed income stream for life. The fact that nothing else can do this is an indicator of what an annuity can do for financial peace of mind. However, just with anything, there are pros and cons to annuities.
Are annuities worth it?
Annuities are one option that you might turn to. An annuity pays you an ongoing income stream and lets you avoid running out of money. It’s the only thing besides Social Security that will generate guaranteed income for life. But of course, annuities have pros and cons, just as everything does.
How much money can you take out from an annuity?
That is the trade-off that you get for an annuity with its steady, unchanging income stream in market conditions and economic conditions that are good and bad. That being said, many annuities let you have some money access with free withdrawals. In other words, you can take out up to 10% of your annuity’s contract value each year.